What Is a Non-Callable CD?
Folks who save lots of money are sometimes looking for a safe place to keep their savings, with little risk. That's where certificates of deposit, or CDs, come into play: You hand over your money, and a bank agrees to pay you a fixed amount of interest over a fixed period of time. The interest is paid quarterly, yearly or at the end of the period. Some CD deposits last for six months, others last for years. During this time, you may not have access to the money; if you do withdraw before the period expires, you may forfeit some or all of the interest. The bank returns your principal at the end of the deposit period, plus any interest accrued. In certain cases, a bank may "call" a CD, meaning that they return your money prior to the agreed-upon period.
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Calling Features
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With a non-callable CD, the bank forfeits its right to return your money. This represents a risk to the bank, because the interest at which a bank borrows money may fall, thus making your CD unprofitable. Thus, a non-callable CD may pay a lower interest rate. This situation makes your CD less profitable for the bank. When a bank exercises its right to call a CD, it means that you may have to shop around for a new vehicle that would likely pay lower interest rates.
Fine Print
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The Securities and Exchange Commission notes that the wording of some CD agreements can be misleading. When a bank sells a two-year, non-callable CD , that two-year period may not refer to the life of the investment. Instead, it refers to the length of time the bank has forfeited its right to call the CD. In reality, the life of the CD might last 10 years or longer. Depending on your investment planning, locking up money for 10 years might be inadvisable.
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Traps of the Unwary
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It's important to note that the right to call a CD is held by banks, not the depositor. With a callable CD, the bank has the option of ending the savings plan, but the depositor doesn't. Many people don't understand this. In 2001, the Alabama Securities Commission noted that many elderly people had been mislead into buying 10 to 30 year "callable" CDs under the belief that the depositors could get their money back well before the end of the investment.
Research
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Because investors who buy non-callable CDs are primarily interested in preserving the principal, good research in required to ensure that features of a CD don't contravene that goal. For example, FDIC insures CDs for up to $250,000. But that limit applies for all accounts at a single institution. If you use a deposit broker to purchase a CD, know where your money is going. You could end up with more than $250,000 at a single bank, an thus leave some money at risk if the bank fails. Be sure to research any early withdrawal penalties, and research your broker, as well.
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References
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